On the Relationship between Arithmetic and Geometric Returns

19 Pages Posted: 14 Jun 2012

Date Written: August 14, 2011

Abstract

For a conventional portfolio of risky assets, the paper presents four approximate relationships between the portfolio's arithmetic expected return, geometric expected return, and variance. The paper provides simple quantitative explanations for all four relationships. The results of these formulas are compared to historic data and to each other. The paper identifies the relationship that should be expected to produce the most reliable results.

Keywords: arithmetic expected return, arithmetic average, geometric expected return, geometric average

JEL Classification: G00, G10, G11

Suggested Citation

Mindlin, Dimitry, On the Relationship between Arithmetic and Geometric Returns (August 14, 2011). Available at SSRN: https://ssrn.com/abstract=2083915 or http://dx.doi.org/10.2139/ssrn.2083915

Dimitry Mindlin (Contact Author)

CDI Advisors ( email )

6056 Sunnycrest Dr.
Oak Park, CA 91377
United States

HOME PAGE: http://www.cdiadvisors.com

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